Finals Coverage Flashcards
What are de minimis benefits?
De minimis benefits are facilities and privileges of relatively small value and provided by an employer to employees merely as a means to promote their health, good will, contentment, or efficiency. They are fringe benefits, but not taxable.
These de minimis benefits are exempt from income tax only to the extent of the amount of the threshold provided by the BIR regulations, which is Php 90,000.
What are fringe benefits? How is it computed?
Under the Tax Code, fringe benefit means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank-and-file) such as but not limited to:
(a) Housing
(b) Expense account
(c) Vehicle of any kind
(d) Holiday and vacation expenses
A final tax of 35% is imposed on the grossed-up monetary value (actual monetary value divided by 65%) of fringe benefit furnished or granted to the employee by the employer.
Being another capital asset transactions, what is the difference between a long term capital gain v. short term capital gain?
Long term capital gain is where capital asset is held more than 12 months before it is sold. Only 50% of the gain is recognized.
In short term capital gain, capital asset is held for 12 months or less, 100% of the gain is subject to tax.
Being another capital asset transactions, what is the difference between net capital gain v. net capital loss?
Net capital gain is the excess of the gains over the losses on sales or exchange of capital assets during the taxable year.
Net capital loss on the other hand, is the excess of the losses over the gains on sales or exchanges of capital assets during the taxable year.
With regards to the capital loss limitation rule, what does it say?
General rule, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges.
This rule applies to both corporations and individuals except banks and trust companies.
What is the rule regarding net capital loss carry over?
If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months.
What is the difference between Net Capital Loss Carry Over (NCLCO) and Net Operating Loss Carry Over (NOLCO)?
With regards to applicability, the former applies only to individual taxpayers while the latter applies to both individual and corporate taxpayers.
As to the amount, the former is limited to the amount of the taxable income in the year the loss was sustained, while there is no limit as to the latter.
As to the period of carry-over, the loss in the former can be carried over to the succeeding year, while in the latter, the loss can be carried over to the next 3 consecutive years immediately following the year of such loss.
What are the three types of deductions from gross income? Explain each briefly.
There are two types of deductions from gross income:
(1) Itemized deductions which are available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines.
(2) Optional standard deduction which is available to individual and corporate tax payers deriving business, professional capital gains, passive income or other income not subject to final tax.
(3) Special Additional Deductions
Enumerate the itemized deductions.
The following are itemized deductions:
(1) Ordinary and necessary business expenses
(2) Interest expense
(3) Taxes
(4) Losses
(5) Bad Debts
(6) Depreciation
(7) Depletion
(8) Charitable and other contributions
(9) Research and development
(10) Pension trust
As an itemized deduction, what are the requisites with regards to ordinary and necessary business expenses?
In order for a taxpayer to claim deductions of ordinary and necessary business expenses, the following requisites must be present:
(1) The expense must be ordinary
(2) It must have been paid or incurred during the taxable year
(3) It must have been paid or incurred in carrying on the trade or business of the taxpayer
(4) It must be supported by receipts, records, or other pertinent papers
(5) Expenses must not be contrary to law, morals, or public policy
(6) Must be reasonable
What is the rule regarding the all-events test?
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy.
One of the requirements of the itemized deduction of ordinary and necessary business expenses is that the expenses must be reasonable and necessary. What is the rule regarding this?
There is yet to be a clear-cut criteria or
fixed test for determining the reasonableness of an advertising expense. There being no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these,
among other factors and properly weighed, that will yield a proper evaluation.
In the case of Commissioner of Internal Revenue v. General Foods, what is the ruling of the Court with regards to the reasonableness and necessity of advertising expenses?
As mentioned by the Supreme Court, we should distinguish between the advertising expenses that can stimulate current sales and those for future sales.
If the expenditures are for the advertising
of the first kind, then, except as to the question of the reasonableness of the amount, there is no doubt such expenditures are deductible as business expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a reasonable period of time.
As an itemized deduction, what is the rule regarding interest expense?
In general, the amount of interest expense paid or incurred within a taxable year on the indebtedness in connection with the taxpayer’s trade, business or exercise of profession shall be allowed as a deduction from the taxpayer’s gross income.
What are the conditions for the deductibility of interest expense?
(1) There must be a valid and existing indebtedness;
(2) The indebtedness must be that of the taxpayer;
(3) The interest must be legally due and stipulated in writing;
(4) The interest expense must be paid or incurred during the taxable year;
(5) The indebtedness must be connected with the taxpayer’s trade, business, or exercise of profession;
(6) The interest payment arrangement must not be between related taxpayers
(7) The interest is not expressly disallowed by law to be deducted from the taxpayer’s gross income
8. The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayer’s otherwise allowable deduction for interest expense shall be reduced by 20%.
With regards to taxes as an itemized deduction, what is the rule?
All taxes, national or local, paid or accrued during the taxable year in connection with the trade or business profession of the taxpayer are deductible from gross income. Except:
(1) Philippine Income Tax
(2) Foreign Income Tax
(3) Estate and Donor’s Taxes
(4) Special assessments on real property
(5) Electric energy consumption tax
(6) Value Added Tax
What are the conditions for taxes as an itemized deduction?
(1) Payments must be for taxes;
(2) Taxes are imposed by law upon the taxpayer;
(3) Taxes must be paid or accrued during the taxable year in connection with the taxpayer’s trade, business or profession;
(4) Taxes are not specifically excluded by law from being deducted from the taxpayer’s gross income.
What are the different classification of losses as an itemized deduction?
(1) Those incurred in trade or business for profit
(2) Those incurred in any transaction entered into for profit, although not connected with the trade or business
(3) Casualty losses that arise from fire, storm, shipwreck or other casualty or from theft or robbery, even though not connected with the trade or business of the taxpayer.
When do you have a net operating loss?
You will only have taxable income if your gross income is higher than the allowable deductions. On the other hand, if the gross income is less than the allowable deductions, you have no taxable income. Instead, you have a net operating loss.
What are the conditions for the deductibility of losses as an itemized deduction?
(1) The loss must be that of the taxpayer;
(2) The loss is actually sustained and charged off within the taxable year;
(3) The loss is evidenced by a closed and completed transaction;
4() The loss is not claimed as a deduction for estate tax purposes;
(5) The loss is not compensate for by insurance or otherwise;
(6) In the case of an individual, the loss must be connected with his trade, business, or
profession or incurred in any transaction entered into for profit though not connected with his trade, business or profession; and
(7) In the case of casualty loss, it has been reported to the BIR within 45 days from the date of occurrence of the loss.
What is a bad debt as an itemized deduction?
Bad debts refers to debt resulting from the
worthlessness or uncollectibility, in whole or in part, of amount due the taxpayers by others, arising from money lent from uncollectible amounts of income from goods or services rendered. A bad debt arises when a loan or debt for services or sale or rental of property becomes worthless or uncollected.
